The Race to the Bottom

“I can’t recall a move in currencies that has been so deliberate and so linear without any apparent real change in fundamentals,” said ANZ’s Richard Yetsenga on CNBC Asia’s “Squawk Box.” “The yen’s move has largely been on the basis of an apparent move in government policy and the market is front-running that.”

Of course, everyone has noticed Tokyo’s new currency policy. Europe and South Korea in particular have complained, but China by and large has not.

Why complain when you can engineer the value of your currency? Beijing has been manipulating the yuan downward, and Seoul has been fiddling with the won. The South Korean currency is down 2.53% against the dollar since the end of December. At the same time, the Taiwan dollar is off 2.37% against the greenback. From all outward appearances, countries in Asia are now engaged in competitive devaluations.

So far, Beijing has escaped blame for starting the race to the bottom. “Has China Quietly Joined the Currency War?” CNBC asked on Thursday. That is not the right question because it is not possible for China to join the conflict. China, unfortunately, started it, at least a decade ago in fact.

All three of the countries mentioned—China, Japan, and South Korea—hold dollar reserves beyond their needs and in excess of international agreements to which they are parties. We should complain to the WTO over their predatory weak currency policies and, in the absence of action, impose tariffs unilaterally.

Meanwhile, an Asian currency war, a race to the bottom, will nullify either monetary or fiscal remedies for our own ailing economy.

While the countries devaluing their currencies are aiming for a certain exchange rate (price) the Federal Reserve can, at any time, sterilize their efforts by targeting quantity. So the Japanese for example buy $10 billion dollars with Yen, and the Fed responds by buying up those Yen to neutralize their effect on exchange rates. Meanwhile all that money deployed by the BoJ and Fed ends up as deposits in the others’ CB and markets won’t feel a bit of it.